Rajlaxmi Petrochem Pvt. Ltd., Latur V. Income-tax Officer,

ITA 1526/PUN/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1067 (ITAT-PUNE)
• Duration Of Justice: 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2011-2012
• Appeal Filed On: 12-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUHAS S KULKARNI
• Keywords: Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, PUNE . . , BEFORE SHRI R.K. PANDA, AM . / ITA NO.1526/PN/2016 / ASSESSMENT YEAR : 2011-12 RAJLAXMI PETROCHEM PVT. LTD., 84/2, INANI HOUSE, MAIN ROAD, LATUR 413512 PAN :AACCR7636L . / APPELLANT V/S ITO, WARD - 3(3), LATUR . / RESPONDENT / APPELLANT BY : SHRI M.K. KULKARNI / RESPONDENT BY : SHRI SUHAS S. KULKARNI, JCIT / ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 19-05-2016 OF THE CIT(A)-2, AURANGABAD RELATING TO THE ASSESSMENT YEAR 2011-12. 2. ALTHOUGH A NUMBER OF GROUNDS HAVE BEEN RAISED BY TH E ASSESSEE THEY ALL RELATE TO DENIAL OF DEPRECIATION OF RS.20,23,393/-. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING O F ETHANOL FROM SDS. IT FILED ITS RETURN OF INCOME ON 27-09-2 011 DECLARING TOTAL INCOME AT RS.8,14,300/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT ASSESSEE COMPANY IS IN THE BUSINESS OF MANUFACTURING OF ETHANOL FROM SDS. THE RAW MATERIAL IS REQUIRED TO BE PURCHASED FROM DISTILLERIES OF SUGAR FACTO RIES. THE COMPANY HAS TO CONTACT VARIOUS SUPPLIERS FOR BULK PURCHA SE AT / DATE OF HEARING :25.08.2016 / DATE OF PRONOUNCEMENT:26.08.2016 2 ITA NO.1526/PN/2016 SPECIFIED RATES. DURING THE RELEVANT PREVIOUS YEAR FOR CER TAIN BUSINESS RELATED REASONS THE ASSESSEE COMPANY DECIDED THAT IT W AS BETTER TO SELL THE RAW MATERIAL IN A MARKET AND MADE A CONTRACT WITH G ODAVARI BIO REFINERIES TO WHICH THE RAW MATERIAL WAS SOLD. THE ASSESS EE HAD SHOWN SALE OF RS.11,550/- IN THE PROFIT AND LOSS ACCOUNT. THE AO NOTED THAT DURING THE RELEVANT PREVIOUS YEAR THE MANUFA CTURING ACTIVITY OF THE COMPANY HAS COME TO STOP AND THE COMPA NY DID NOT PUT ITS PLANT AND MACHINERY TO USE. HOWEVER, THE ASSESSEE HAS CLAIMED DEPRECIATION ON THE PLANT AND MACHINERY WHICH IS EVIDENT FR OM THE DEPRECIATION SCHEDULE AND THE SAME HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AND HAS ALSO DEDUCTED FROM THE TOTAL INCOM E IN COMPUTATION OF INCOME FOR THE PURPOSE OF ARRIVING AT THE T OTAL INCOME OF THE ASSESSEE. THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DEPRECIATION ON PLANT AND MACHINERY SHOULD NOT BE DISALLOWED. 4. IT WAS EXPLAINED BY THE ASSESSEE THAT IT HAS NEITHER CLOSED ITS FACTORY NOR HAD CEASED TO DO THE BUSINESS. IT WAS SU BMITTED THAT THOUGH THE MANUFACTURING ACTIVITY WAS NOT CONDUCTED DUR ING THE RELEVANT PREVIOUS YEAR HOWEVER THE PLANT WAS KEPT IN RE ADY CONDITION IN ANTICIPATION OF THE STARTING OF THE MANUFACTURING ACTIVITY AS AND WHEN THE MARKET CONDITIONS IMPROVE AND THERE WAS A CHA NGE IN COMMERCIAL VIABILITY OF ETHANOL PRODUCTION. IT WAS ARGUED TH AT THE GOVERNMENT POLICY ON ETHANOL WAS NOT CLEAR DURING THE YE AR 2009-10 AND 2010-11 AND THEREFORE IT WAS UNECONOMICAL TO MAINTAIN THE SUPPLY OF ETHANOL. IT WAS THEREFORE IN THE INTEREST OF TH E BUSINESS THAT THE MANAGEMENT THOUGHT IT NECESSARY TO TEMPORARILY ST OP THE MANUFACTURING ACTIVITIES AND AVOID INCIDENCE OF INCURRING LOSS. THE BUSINESS HAS NOT BEEN DISCONTINUED OR TERMINATED DURING THE PERIOD UNDER CONSIDERATION AND THE COMPANY HAD MERELY DECIDED TO 3 ITA NO.1526/PN/2016 TEMPORARILY SUSPEND THE MANUFACTURING ACTIVITIES AT ITS FAC TORY. IT WAS ARGUED THAT SUSPENSION DOES NOT NECESSARILY AMOUNT TO ITS DISCONTINUATION OR CLOSURE OF THE BUSINESS AND THAT THE ASSESSEE IS MAINTAINING ITS ESTABLISHMENT AND WAITING FOR IMPROVING THE MA RKET CONDITION. IT CANNOT BE SAID THAT IT HAD ABANDONED OR C LOSED ITS BUSINESS FOR EVER. IT WAS STATED THAT IT IS NOT NECESS ARY THAT IN THE INTERVALS OF INACTIVITY WHEN IT LIES QUIET AND DORMANT, PROD UCTION PROCESS SHOULD NECESSARILY BE CONTINUED IN ORDER TO CLAIM DEPRE CIATION. RELYING ON VARIOUS DECISIONS IT WAS ARGUED THAT ONCE THE MACHINE HAS BEEN BROUGHT FOR A PARTICULAR PURPOSE CONNECTED WITH TH E ACTIVITIES OF THE ASSESSEE AND THE SAME HAS NOT BEEN DISCARDED BUT IS KEPT READY FOR USE THE ASSESSEE BECOMES ENTITLED TO DEPRECIATION IN ACCORDANCE WITH THE PROVISIONS OF THE I.T. ACT. IT WAS ALSO ARGUED T HAT USER OF ASSET COMPRISES PASSIVE AS WELL AS ACTIVE USER. FURTHER, THE PARTICULARS OF DEPRECIATION DOES NOT DEPEND UPON ACTUAL W ORK OF THE MACHINERY AND IT IS SUFFICIENT IF THE ASSESSEE KEEPS THE MA CHINERY READY FOR USE DURING THE COURSE OF ITS BUSINESS. IT WAS ALSO ARGUED THAT THOUGH IN ITS CASE THERE WAS NO MANUFACTURING ACTIV ITY DURING THE YEAR THE ASSESSEE HAD CONTINUED THE BUSINESS ON SMALL SCALE BY BOOKING MATERIAL IN ANTICIPATION OF ORDERS FROM PETROLEUM COM PANIES FOR ETHANOL AND HAD ALSO RETAINED AND MAINTAINED ITS PLANT. 5. HOWEVER, THE AO WAS NOT SATISFIED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. RELYING ON VARIOUS DECISIONS HE HELD TH AT SINCE THE COMPANY HAD NOT USED ITS PLANT AND MACHINERY EVEN FOR A SINGLE DAY DURING THE YEAR UNDER CONSIDERATION, THE DEPRECIATION CLAIM ED BY IT COULD NOT BE ALLOWED. HE ACCORDINGLY MADE ADDITION OF RS.20 ,23,393/- TO THE TOTAL INCOME OF THE ASSESSEE. 4 ITA NO.1526/PN/2016 6. BEFORE THE CIT(A) THE ASSESSEE MORE OR LESS REITERAT ED THE SAME ARGUMENTS AS MADE BEFORE THE AO. VARIOUS DECISIONS WERE ALSO RELIED ON BY THE ASSESSEE TO THE PROPOSITION THAT ALLOWANCE FOR DEPRECIATION DOES NOT DEPEND ON THE ACTUAL WORKING OF THE MACHINERY . IT IS SUFFICIENT IF THE MACHINERY IN QUESTION IS EMPLOYED BY THE ASS ESSEE FOR THE PURPOSE OF THE BUSINESS AND IS KEPT READY BY HIM FOR ACTUAL USAGE. IT WAS ARGUED THAT IF THE ASSET IS NOT SOLD, DISCARDED OR DEMOLISHED OR DESTROYED DURING THE PREVIOUS YEAR THE ASSESSEE BECOM ES ENTITLED TO DEPRECIATION. 7. HOWEVER, THE CIT(A) ALSO WAS NOT SATISFIED WITH THE AR GUMENTS ADVANCED BY THE ASSESSEE. DISTINGUISHING THE VARIOUS DE CISIONS CITED BEFORE HIM AND RELYING ON CERTAIN OTHER DECISIONS THE LD .CIT(A) UPHELD THE ACTION OF THE AO. 8. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 9. I HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PA PER BOOK FILED ON BEHALF OF THE ASSESSEE. I HAVE ALSO CONSIDERED THE VA RIOUS DECISIONS CITED BEFORE ME. THE ISSUE INVOLVED IN THE INSTANT APPEAL IS ALLOWABILITY OF DEPRECIATION ON THE PLANT AND MACHINERY WHICH WERE NOT USED DURING THE IMPUGNED ASSESSMENT YEAR. IT IS THE CASE OF THE ASSESSEE THAT THE PLANT AND MACHINERY WERE KEPT READY FOR USE A ND INFACT IN SUBSEQUENT ASSESSMENT YEAR DEPRECIATION HAS BEEN ALLOWE D BY THE AO. IN MY OPINION, DEPRECIATION IN THE INSTANT CASE CANNOT BE DENIED TO THE ASSESSEE ALTHOUGH THE PLANT AND MACHINERY WERE NOT US ED DURING THE YEAR BUT WERE A PART OF THE BLOCK OF ASSETS. 5 ITA NO.1526/PN/2016 10. AN IDENTICAL ISSUE HAD COME UP BEFORE THE HONBLE BOM BAY HIGH COURT IN THE CASE OF CIT VS. G.R. SHIPPING VIDE ITA NO.598/ 2009 ORDER DATED 20-07-2009. IN THAT CASE, THE ASSESSEE WAS EN GAGED IN SHIPPING BUSINESS AND OWNED A BARGE WHICH WAS INCLUDED IN THE BLOCK OF ASSET S. THE BARGE MET WITH AN ACCIDENT AND SUNK ON 06-03-2000 , I.E. RELEVANT TO A.Y. 2000-01. AS THE EFFORTS TO RETRIEVE THE BARGE WAS UNECONOMICAL THE BARGE WAS SOLD ON AS IS WHERE IS BASIS FOR RS.55 LAKHS IN THE MONTH OF MAY 2001 RELEVANT TO A.Y. 2002-03. AS THE BARGE WAS NON OPERATIONAL AND NOT USED FOR BUSINESS IN A.Y. 2001-02 THE AO DENIED DEPRECIATION. THE TRIBUNAL HELD THAT AFTER THE CONCEPT OF BLOCK OF ASSET W.E.F. 01-04-1988, INDIVIDUAL ASSETS HAD LOST THEIR IDEN TITY ONCE IT ENTERED IN THE BLOCK OF ASSETS AND ONLY THE BLOCK OF A SSETS HAD TO BE CONSIDERED. IT WAS HELD THAT THE TEST OF USER HAD TO B E APPLIED UPON THE BLOCK OF ASSETS AS A WHOLE AND NOT ON INDIVIDUAL ASSE TS. ON APPEAL BY THE REVENUE, THE HONBLE HIGH COURT DISMISSED THE APP EAL FILED BY THE REVENUE AND UPHELD THE DECISION OF THE TRIBUNAL. 11. SINCE IN THE INSTANT CASE ALSO, THE ASSETS HAVE ALRE ADY ENTERED INTO THE BLOCK OF ASSETS, THEREFORE, FOLLOWING THE DECISION OF T HE HONBLE BOMBAY HIGH COURT CITED (SUPRA) I HOLD THAT THE ASSESSE E IS ENTITLED TO DEPRECIATION ON THE PLANT AND MACHINERY WHICH HAVE ENTE RED INTO BLOCK OF ASSETS AND ARE KEPT READY FOR USE BUT NOT USE D DURING THE YEAR. IT HAS ALSO BEEN HELD IN VARIOUS DECISIONS THAT WHE RE THE PLANT AND MACHINERY WERE KEPT READY FOR PRODUCTION, THE ASSES SEE WOULD BE ENTITLED TO CLAIM DEPRECIATION EVEN THOUGH SUCH PLANT AND MACHINERY WERE NOT ACTUALLY PUT TO USE BY THE ASSESSEE DURING T HE YEAR (CIT VS. NAHAR EXPORTS LTD. REPORTED IN 296 ITR 419 AND CIT VS . SHAHBAD CO- OPERATIVE SUGAR MILLS LTD. REPORTED IN (2011) 56 DTR 414 (PH)). FURTHER, THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESS EE THAT THE 6 ITA NO.1526/PN/2016 AO IN THE SUBSEQUENT YEARS HAS ALLOWED DEPRECIATION ON T HE PLANT AND MACHINERY COULD NOT BE CONTROVERTED BY THE LD. DEPARTM ENTAL REPRESENTATIVE. IN VIEW OF THE ABOVE DISCUSSION, I SET AS IDE THE ORDER OF THE CIT(A) AND DIRECT THE AO TO ALLOW THE CLAIM OF DEPRE CIATION. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 26-08-2016. SD/- ( R.K. PANDA ) ACCOUNTANT MEMBER PUNE ; DATED : 26 TH AUGUST, 2016. '# $# / COPY OF THE ORDER FORWARDED TO : / BY ORDER , // TRUE COPY // // $ % //TRUE COPY // // &' % * / SR. PRIVATE SECRETARY *, / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT (A) - 2, AURANGABAD 4. THE CIT-2, AURANGABAD 5. $ %%* , * , SMC BENCH / DR, ITAT, SMC BENCH PUNE; 6. 2 / GUARD FILE.